From the NY Times, January 3, 2005
With Geopolitics, Cheap Oil Recedes Into Past
By JAD MOUAWAD
IT was a year that people in the oil markets are unlikely to forget -
a year that prices set records, forecasts lost touch with reality,
and almost everything that could go wrong, did. It was also a year
that politics returned to the oil market.
And the trend is likely to continue this year. While oil prices have
declined since October, many of the issues that have vexed the oil
industry in 2004 are expected to recur. Cheap oil increasingly looks
like a thing of the past.
Through the 1990's, prices were stable, supplies were secure and
there was plenty of extra capacity to keep energy costs low and
world growth buzzing. At an average of $20 a barrel, oil was viewed
as just another commodity.
But then came ethnic and labor troubles in Nigeria; chaos and
protests in Venezuela before President Hugo Chávez won a referendum
allowing him to stay in power; hardball energy politics in Russia;
and the continuing insurgency in Iraq.
While supplies of oil to the world markets were rarely interrupted,
the uncertainties created by these events raised crude oil prices in
New York by two-thirds this year, to a high of more than $55 a
barrel in October. And as energy costs surged, many analysts,
traders and politicians woke up to the reality that oil was
different from cocoa or coffee.
"Oil is a political commodity," said Robert Mabro, president of the
Oxford Institute for Energy Studies, one of the world's foremost
energy experts. "Geopolitics is the most fundamental issue if you're
looking at oil markets. People seem to have forgotten that since the
Of course, this is not the first time that oil and politics have
Decades ago, militant governments in Iran and Libya, for example,
nationalized their oil sectors, forcing American and European
companies out and taking charge of their natural resources. Then
came the oil embargo and the price shocks of 1973-74 and 1978-81,
with long lines for gasoline and steep rises in inflation.
But for the most part, politics had dropped off the energy map since
then. In the 1980's, energy experts largely discounted a war between
two of the Persian Gulf's top oil producers, Iran and Iraq, because
Saudi Arabia and some other OPEC nations could simply crank up their
production to make up for losses.
Even the invasion of Kuwait by Iraq in the summer of 1990, and the
subsequent embargo on their oil exports, roiled energy markets for
only a few weeks.
But in recent years, the oil industry has undergone a fundamental
change. While demand has steadily increased each year, the
industry's exploration efforts have not kept pace in new
Now that worldwide production is running at full speed to meet
increased demand, there is no cushion left in the system to weather
a potential blow to producers like Iraq, Venezuela, Iran, Russia or
So, once again for oil markets, politics matters.
For instance, said Amy Myers Jaffe, the associate director of Rice
University's energy program, Saudi Arabia's oil industry is no
longer seen as being impenetrable to terrorist attacks; tensions in
the Persian Gulf could swell over Iran's nuclear program; Nigerian
factions may erupt in violence; and the fighting in Iraq goes on.
"All kinds of things can affect this market," Ms. Jaffe
said, "especially when you're in a razor-thin situation. The only
thing that could dramatically alter the outlook is a major economic
The heightened geopolitical risk has translated into higher prices,
something analysts call a "risk premium." Crude oil prices have
averaged $30 a barrel since 2000, but last year crude oil in New
York climbed to an average of $41 a barrel. While energy prices are
high, adjusted for inflation they are below the level in March 1981,
when crude oil approached $70 a barrel in today's dollars. Still,
analysts do not expect prices to fall anytime soon.
High world prices since mid-2002 have helped sustain the economic
recovery of Russia, which is raising output, according to the Energy
Information Agency of the Department of Energy.
The former Soviet Union, of which Russia is by far the biggest
country, is the world's largest producer, the agency says, followed
by Saudi Arabia and the United States. The biggest consumers are the
United States, which imports over half its needs; China; Japan; and
the former Soviet Union, which uses about a third as much as it
produces. Leo Drollas, chief economist for the Center for Global
Energy Studies in London, expects oil prices to be higher in 2005,
on average, than they have been this year. The institute was founded
in 1990 by Sheik Ahmed Zaki Yamani, the former Saudi oil minister.
Even oil companies, which are usually extremely conservative about
their price outlook, are coming around to that realization. Lord
Browne, the chief executive of BP, now sees a new bottom of $30 a
barrel for the next few years.
"There is something fundamental holding prices up, whether that's at
$45, $40 or $35 a barrel," Mr. Mabro of the Oxford Institute
said. "And politics won't improve things. Except if you believe a
miracle is going to happen in Iraq."